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Special Edition Roundtable
Money in the Time of Coronavirus

Contributors: Katharina Pistor, James McAndrews, Saule Omarova, Mark Blyth, Jamee Moudud, Elham Saeidinezhad, Dan Awrey, Fadhel Kaboub, Leah Downey, Virginia France, Lev Menand, Nadav Orian Peer, Robert Hockett, Carolyn Sissoko, Jens van 't Klooster, Oscar Perry Abello, and Gerald Epstein

Banking: Intermediation or Money Creation
Roundtable 1 Prompt

Contributors: Morgan Ricks, Marc Lavoie, Robert Hockett, Saule Omarova, Michael Kumhof, Zoltan Jakab, Paul Tucker, Charles Kahn, Daniel Tarullo, Stephen Marglin, Howell Jackson and Christine Desan

Prompt for Discussion

Commercial banks are, indisputably, at the center of credit allocation in virtually all modern economies. Astonishingly, however, it remains controversial exactly how banks expand the money supply.

According to one view, banks operate as intermediaries who move money from savers to borrowers. The basic idea is that banks extend the monetary base by lending out of accumulated funds in a reiterative way. In round 1: a bank takes a deposit, sets aside a reserve, lends on the money; round 2 – the money lands in another bank, that bank sets aside a reserve, lends on the money; round 3 – the process repeats. Money’s operation is effectively multiplied in the economy because banks transmit funds constantly from (passive) savers to (active) borrowers, thus distributing money across those hands. The system works because savers, who are content to leave their funds alone, are unlikely to demand more than the (respective) reserve amounts back from any round. Banks balance their flow of funds over time as borrowers repay their loans.

Banking: Intermediation or Money Creation
R. Hockett & S. Omarova, What Do Banks Intermediate?

February 5, 2020

Robert Hockett, Cornell Law School
Saule Omarova, Cornell Law School

Apparently there still are people who believe that the principal role of commercial banks is to ‘intermediate’ between depositors and borrowers – lending the funds of the former to the latter at a premium, conveying a portion of that premium to the former, and pocketing the remainder.

Current Scholarship
Are Bank Fiduciaries Special?

Author: Robert Hockett

A growing body of post-crisis legal and economic literature suggests that future financial crises might be averted by tinkering with the internal governance structures of banks and other financial institutions. In particular, contributors to this literature propose tightening the fiduciary duties under which officers and directors of the relevant financial institutions labor. I argue in this symposium article that such proposals are doomed to failure under all circumstances save one - namely, that under which the relevant financial institutions are in whole or in part treated as publicly owned. The argument proceeds in two parts. I first show that the financial dysfunctions that culminate in financial crises are not primarily the products of defects in individual rationality or morality, ubiquitous as such defects of course always are. Rather, I argue, fragility in the financial markets stems from what I elsewhere dub recursive collective action problems, pursuant to which multiple acts of individual rationality aggregate into instances of collective calamity. This form of vulnerability is endemic to banking and financial markets. I next show that the best understanding of fiduciary obligation is that pursuant to which she who is subject to the obligation minimizes the 'space,' or separateness, that subsists between her and the beneficiary of her obligation.

Podcast
MDM 2018 Panel: Economic Democracy through Monetary Design

Recognizing money as a public project necessarily leads to a re-examination of the types of economic institutions promoted by our monetary system. Throughout American history, both social movements and the US government have seen the potential to create, through the monetary system, an economy dominated by more democratic forms of economic organization. This panel will examine both historical and modern attempts to create more widespread and democratic ownership of the productive economy through the monetary system.

Presentations and Discussion

Robert Hockett – Cornell Law School, “A Monied Yeomanry”
Joseph R. Blasi – Rutgers School of Management and Labor Relations,
“The Citizen’s Share: Reducing Inequality in the 21st Century”
Lenore Palladino – Roosevelt Institute,
“Economic Democracy through Corporate Governance.”
Jeffrey Sklansky – University of Illinois at Chicago,
”The Currency of Agrarian Cooperation in the Gilded Age”

Moderator: Martin Drake – Harvard Law School